Economics and...

Tuesday, October 31, 2006

My Favorite YouTube Channel

OK, it’s my blog, and I can talk about whatever I want. This has nothing to do with economics (unless I think of a connection before I finish writing this). Today I’m going to practice embedding video. I haven’t come across any economics videos that are really worth watching (except maybe the occasional joke video like the “Every Breath You Take” parody addressed to Ben Bernanke, but that’s no longer current enough to be funny). So instead I’m going to promote my favorite YouTube channel, which is probably about as far from economics as you can get.

This video is from OhYeahShauna. I didn’t know which of Shauna’s videos to choose, so I picked the one with the highest user ratings. (Shauna also has videos up on ShaunaInWonderland, which she used before she accidentally converted it to a comedian account.) Frankly, Shauna’s videos are among only a few that I’ve seen on YouTube that didn’t seem like a waste of my time. She’s not a professional, and she’s still very young (just out of high school, and apparently not yet aware of the subtle orthographic difference between the adjective “cubical” and the noun “cubicle”), but she seems to have a real knack for video editing, and I like the music she chooses. Oh, and it helps that she’s gorgeous.

She works with certain limitations, such as a small memory card that frequently cuts her off, and sometimes needing to film in the bathroom to get adequate lighting at night. Somehow she seems to turn the limitations to her advantage. (A bit like Picasso’s blue period, perhaps, at least if you believe the rumor that he couldn’t afford a full palette.) One of the scenes from one of her videos seems to indicate that her boyfriend Max is also involved in some of her videos, but it’s not clear whether his involvement is creative or merely technical.

…and after you’ve finished watching all of Shauna’s videos, go rent the DVD of Kurosawa’s Ran.

Thursday, October 26, 2006

Do labor shortages indicate a strong labor market?

Sorry I haven’t blogged in so long. Lack of ideas, mostly. Plus I’m busy not having ideas on my day job.

Today I have an idea. A lot of anecdotal evidence seems to suggest that labor shortages are a problem in the US today. Yet statistics – note, particularly, help wanted advertising, which is near a 50-year low – show little evidence of strong labor demand. Is this inconsistent?

I don’t think so. If different kinds of labor are complements in production, then shortages of certain kinds of labor could actually make the overall labor market weaker. For example, if individuals with a lot of different skills are required to make a product, then a shortage of one of those skills will depress demand for all the other skills. If chefs are in short supply, the demand for waiters will go down. Is this the kind of thing that’s happening in the US today? It seems plausible to me that shortages of certain technical and managerial skills could be depressing overall labor demand. Just an idea.

Sunday, October 15, 2006

Energy Independence?

The issue of energy independence has come into the US political limelight recently. But the whole project seems pretty hopeless to me. A policy to move toward energy independence requires 3 components:

Reduce domestic energy consumption.

Conserve domestic energy resources.

Maintain and improve domestic energy production infrastructure.

To do any one of these 3 things on a significant scale would be rather a tall order. But to do all 3 of them at once without violating international trade rules? Anyone who can figure out a set of policies that achieves that deserves some kind of prize. But I’m not sure she deserves many votes, and I expect she will get even fewer votes than she deserves. “Energy independence” is a nice buzzphrase, but when it comes to actual policies, even any 2 out of 3 would be a tough sell.

The toughest part, logistically speaking, is combining components 2 and 3. The less of our domestic resources we use up, the more our energy production infrastructure is likely to deteriorate. The one way out is to develop new, renewable energy resources. But can we do that on a large enough scale? And can we do it on a large enough scale while at the same time reducing our overall consumption? And can we do it on a large enough scale while at the same time reducing our overall consumption without violating trade rules? And if we can do all that, can it possibly be worth the cost?

Friday, October 13, 2006

Join the Club

In reaction to this, I’m ready to join Greg Mankiw’s Pigou Club (people who support Pigovian taxes on carbon-based energy to deal with global warming – or other detrimental external effects of energy consumption – in an efficient way). There are a few reasons I might not be accepted, though:

I’m not sure that anonymous bloggers are qualified for admission.

I have to confess that my rationale is not 100% Pigovian. It seems clear to me that, even if Al Gore is only a little bit right about the causes and consequences of global warming, the optimal Pigovian tax is extremely high – much higher than what would be politically feasible (in the US) even in my wildest dreams. Energy demand is just not elastic enough, even in the long run, and the social costs of global warming are too high. So, for practical purposes, I see any increase in energy taxes more as a nondistortionary tax than as a Pigovian tax. There is a standard argument that taxes don’t do any harm if they don’t change behavior; in this case, changing behavior is gravy. (As for global warming, well, I’m just glad I’m going to die in another 40 years or so.)

The argument commonly advanced against Pigovian taxes is that we cannot measure the relevant quantities well enough to ascertain the optimal tax. For example, in the (Toronto) National Post article linked at the beginning of this post:

The problem with a Pigovian gasoline tax is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in gasoline consumption? And what's the price to be set at? How high will the tax have to go before it changes behaviour enough to reduce demand? Will the government just wing it and see what happens? Will the alternative behaviour be any better or create new externalities and unintended consequences? What does government do with the money collected -- except launch a program of subsidies and spending to run alternative economic initiatives?

Since I’m convinced that the optimal tax is much higher than what is politically feasible, the uncertainty about the exact number is not a problem for me: I just advocate the highest tax possible. More generally, though, one might always set some reasonable lower bound and argue that the tax should be at least that high. The Post’s argument, as I commented in Greg Mankiw’s blog post (linked at the top), is essentially saying that government is generally incompetent, so whenever there’s a problem that the private sector can’t fix, the only reasonable approach is to ignore the problem. And then I proceeded to apply the same logic elsewhere:

The problem with using government-supplied police officers to protect citizens from crime is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in crime? And what are the wages of police officers to be set at? How much of this so-called police protection will have to be supplied before crime is sufficiently reduced? Will the government just wing it and see what happens? Will the police forces be any better than criminals, or will they create new externalities and unintended consequences? Where will the government get the money to pay these police officers?

I realize that a few anarchists won’t regard this as a reductio ad absurdum, but I’m not an anarchist myself. The debate does continue, however, and you can read it in the subsequent comments to Greg Mankiw’s post.

Wednesday, October 11, 2006

Nobel Topic

Edmund Phelps wins the Nobel Memorial Prize “for his analysis of intertemporal tradeoffs in macroeconomic policy,” and it takes me two whole days to realize that this is the perfect opportunity to resurrect all my old posts about the NAIRU. (Prof. Phelps invented it, kind of.) OK: here*, here, here, here, here, here, and here (and see the links and the comments to those posts). Or just read the June archives.

More recently, the topic of the Phillips curve has come up (in August) here, here, and here. The point is that Prof. Phelps’ research, and the subsequent acceptance of much of his conclusion, did not eliminate the Phillips curve concept; it merely revised the concept.

The posts from June relate to a more recent attack on the “post-Phelpsian” Phillips curve (possibly with the intent of reinstating the “pre-Phelpsian” Phillips curve, although it’s never quite clear to me). As argued recently by Dean Baker, the NAIRU doesn’t work any more (witness the late 1990s, when the unemployment rate went far below the consensus NAIRU without sparking inflation). In my real-life personality, however, I was arguing as far back as 1994 (along with a few others) that the US NAIRU was falling. As an “out-of-consensus NAIRU guy,” I have never been obliged to discard the NAIRU theory or to come up with extraordinary means of life support for it. By my measures, it did just fine in the late 90s.

But maybe I speak to soon. By my measures, the NAIRU today is about 4%, but the unemployment rate is well above 4%, and yet it appears that inflation is accelerating. My explanation, of course, is that oil prices are the problem. But oil prices are much less of a problem now than they were a few months ago. Circumstances are forcing me to make a falsifiable prediction here: the core inflation rate will come down. When you notice that the core inflation rate is coming down faster than expected, you’ll see that my version of the NAIRU theory has been vindicated. Or else it won’t, and you won’t, and I’ll have to come up with a new theory….

*If you want to follow the argument in my first link above, it’s important to look at the first link within, which leads here, and then click on "Comments" at the bottom of that link. But pay no attention to the woman behind the screen. The blogger formerly known as Angelica is now the retroactively anonymous Battlepanda. (The discussion from the cited post also continues here, which I’m sure is linked in one of my posts above also.)

Sunday, October 08, 2006

Utilitarianism, Happiness, and Optimism

I’ll admit I don’t know a whole lot about happiness research. But as a utilitarian, and as an economist trained in the neoclassical paradigm, I’m rather skeptical. I’m skeptical, in particular, of attempts to equate quantitative, empirical measures of happiness with utility in the philosophical sense or with “true” happiness in any quantitative sense.

A case in point is the frequent finding that optimism is conducive to happiness. Suppose that a study of long-term investors found that optimistic investors obtained better returns. That wouldn’t surprise me at all, but I wouldn’t interpret it to mean that optimism is conducive to better investment results. Indeed, I would conclude exactly the opposite. People are naturally risk-averse; consequently more risky investments must have higher expected returns in order to attract investors. If an investor has average preferences but is “optimistic” in the sense of overestimating expected returns, that investor will choose riskier investments, because he or she will judge (wrongly) that those investments are worth the risk. Similarly, people who have optimistically biased expectations about their lives will be willing to take risks that, on average, result in better outcomes. This doesn’t mean that optimism is good; it just means that the measure of outcomes is not accounting sufficiently for the severity of the bad outcomes among the minority of optimists whose risks do not pay off.

I don’t doubt that optimism has its virtues. Surely certain optimistic biases can be good for the individual if they compensate for other pessimistic biases. And the optimistic bias of entrepreneurs, even if it isn’t good for them, is good for the rest of us, because it compensates for the market’s inability to offer them full diversification of risks. I won’t rule out the possibility that optimistic bias directly affects happiness to an extent that might outweigh the effect of the irrational behavior it produces. But any study that purports to demonstrate that point empirically would require a subtlety of design not easy to achieve.

Saturday, October 07, 2006

Bad Wages

Dean Baker notes that the preliminary benchmark revision to US payroll employment data will mean lower productivity growth. Another implication, provided that there are no compensatory revisions in average hours worked or total compensation, is that average hourly compensation will be lower. For those who have been complaining about anemic wage growth, it looks like the situation may be even worse than they thought.

To Wage War

The Dow is doing well largely because American employers are waging a successful war against wages. Economic growth since early 2000, when the Dow reached its previous peak, hasn’t been exceptional. But after-tax corporate profits have more than doubled, because workers’ productivity is up, but their wages aren’t — and because companies have dealt with rising health insurance premiums by denying insurance to ever more workers.

If you want to see how the war against wages is being fought, and what it’s doing to working Americans and their families, consider the latest news from Wal-Mart....

I have an immediate problem with this explanation for the rising stock market (which is not to say that I have a better explanation). If wages (and total compensation) are being kept down in the face of rising productivity, why isn’t competition keeping prices down as well? It seems to me that, to make his explanation complete, Prof. Krugman needs a story about reduced competition in product markets. Otherwise, there is no reason to expect that the markup of prices over wages should rise as wage bills decline. If wages are the only story, then at best the stock market is being short-sighted in not seeing the eventual effects of competition.

Prof. Krugman’s example, Wal-Mart, is an excellent case in point. Historically, Wal-Mart has reaped the benefit of reduced costs not by raising its margins but by cutting its prices and thereby increasing its market share. Wal-Mart’s profits have gone up, but its competitors’ profits have gone down. (More precisely, some of the competitors’ profits have gone up, but more slowly than they would have in the absence of Wal-Mart’s cost-cutting, whereas other competitors have stopped earning profits altogether and, in many cases, gone out of business.) Historically, Wal-Mart’s cost cutting has not obviously resulted in increased profits for the retailing business in general. Things may have changed now – Wal-Mart may now have such a large market share that it plans to grow by raising margins rather than cutting prices – but in that case, the story is not really a story about costs but a story about monopoly power.

As I said parenthetically above, I don’t have a good explanation for the rising stock market. My best guess as to why profits are so high has been that economic rents in certain industries (oil and software, for example) are puffing up aggregate profits. But this wouldn’t explain why the stock market is still going up. Of course, one doesn’t really need an explanation because we can always attribute stock price movements to changes in the required equity risk premium.

Thursday, October 05, 2006

Intellectual Beauty

Tyler Cowen points us to a photo of the person he claims is (according to RateMyProfessors.com) the hottest female professor in the US. Due to the critical importance of this subject, I feel compelled to comment. Possibly the source has been updated since yesterday, but my research indicates that Myriam Mongrain is only the second hottest. The hottest is Dacia Charlesworth (a Communication professor at Robert Morris University), of whom I can find no photo.

As Prof. Cowen notes, most of the professors on the overall hot list are men. I’m not sure if this indicates that a greater fraction of the hottest professors are men or that a greater fraction of raters are women (or gay men).

Of the 50 hottest professors, 13 are in the field of psychology. Based on my own empirical observations, this doesn’t surprise me, but I have no theoretical explanation for why it should be. The second most well-represented field, which does surprise me, is mathematics, with 8 out of 50. (Oooh, prove that theorem, Baby!)

But…it appears that none of the hot 50 are economists. Can it be? Oh, surely something is wrong with the rating system….

Wednesday, October 04, 2006

Interpreting Stiglitz

Mark Thoma points to a New York Timescommentary by Joseph Stiglitz, in which he suggests a solution to the US trade deficit:

There is one way out of this seeming impasse: expenditure cuts combined with an increase in taxes on upper-income Americans and a reduction in taxes on lower-income Americans. The expenditure cuts would, of course, by themselves reduce spending, but because poor individuals consume a larger fraction of their income than the rich, the “switch” in taxes would, by itself, increase spending. If appropriately designed, such a combination could simultaneously sustain the American economy and reduce the deficit.

There is only one problem with this solution (as Greg Mankiw points out, a bit more politely than here): it doesn’t make any sense.

If the decrease in government spending is offset by an equal increase in consumption due to the change in tax policy, we end up just where we started. As a matter of basic national income accounting, output minus government spending minus consumption equals domestic investment minus the trade deficit. Shifting output from government spending to consumption can’t reduce the trade deficit unless it increases total output or reduces investment. The Fed won’t tolerate an increase in total output (except for normal growth), so that leaves investment as the only possible offset for the trade deficit. But reducing investment doesn’t, in principle, help matters: we end up borrowing less (a lower trade deficit) but also building less productive capacity to pay back what we do borrow.

However, judging by Prof. Stiglitz’ Nobel Prize (as well as by some papers I remember reading by him), he seems like a pretty smart guy. I have to believe there is some method in his madness. The missing piece of this puzzle must have to do with the composition of investment. Some investment (plant, equipment, software) clearly does increase our ability to pay back what we borrow, but other investment (residential housing) probably not so much (although you can try to make an argument that the pleasure of living in better houses will substitute for other material consumption in the future, enabling us to send abroad more of what we produce). Largely as a matter of arithmetic, therefore, I conclude that Prof. Stiglitz expects his proposal somehow to reduce residential investment.

But how, exactly? It would have been nice if he had spelled it out. It seems like a vaguely reasonable conjecture that richer people are more likely to use their marginal income to buy bigger houses, compared to poorer people. (Housing, above some minimum threshold, is a “superior good,” perhaps.) But it isn’t obvious that this would be the case. If Prof. Stiglitz wants to convince other economists, he’s going to have to fill in the rest of the argument here.